Irish leader Enda Kenny has announced a deal with the European Central Bank which will convert the former Anglo Irish bank debt of €28 billion into long term bonds. The interest rate will drop from 8 per cent to 3 per cent with much longer to pay.

As a result, tax increases and spending cuts will be 1 billion lower this year and in future years than expected.

Under the deal the Anglo Irish debt will be replaced with long-term bonds with far longer repayment schedules.

The Anglo Irish debt is part of Ireland’s overall €200 billion debt owed to Europe after the financial crisis.

Kenny said the deal was “An historic step on Ireland’s road to economic recovery”.

Kennedy said the bank debt was is "a heavy burden, a millstone around the neck of the taxpayer".

"Step-by-step, this Government is undoing the disastrous banking policies that brought this State to the brink of national bankruptcy," he told the parliament.

He said the deal was not a “silver bullet” for Ireland. “We still have along way to travel back to prosperity, the damage done by financial institutions will take many years to rectify,” Kenny said.

Earlier, Kenny has welcomed the historic decision to liquidate Anglo Irish Bank – and claimed it is ‘long overdue.’

Emergency legislation to disband the bank, now known as IRBC, was passed by both houses of the Irish parliament after hours of debate in the early hours of Thursday morning.

Irish president Michael D. Higgins made a dramatic return from an official visit to Italy to sign the legislation into law. There were fears that entities holding Anglo debts would file suit to stop the bankruptcy if the bank was not closed down overnight.

The Irish government was forced to rush through the legislation after news of the proposal was leaked by the Bloomberg agency and by Reuters.

However European authorities did not agree until today to a new deal on how the former Anglo bank debt, now Irish sovereign debt of €30 billion euros, is to be repaid leaving considerable confusion at first.

The total Irish sovereign debt to the EU stands at about €200 billion. The Anglo Irish Bank note promissory note accounts for only €30 billion of that.

The government was hoping that an overall deal including the liquidation and new more favorable terms on the Anglo debt could be announced together.

There were chaotic scenes in the parliament as Sinn Fein deputies and independents clashed with the government parties on the proposal.

Speaking after the parliament passed the legislation just after 3am, Prime Minister Kenny said: “The liquidation is necessary to secure the billions of IRBC assets that are ultimately owned by the Irish taxpayer.

“The disappearance of the former Anglo-Irish Bank and Irish Nationwide from our financial, social and political landscape is, in my view, long overdue.

“Both institutions became synonymous, both at home and abroad, with the reckless mismanagement of our banking system and economy under the watch of the previous government.”

Kenny added: “Both banks were emblems of cronyism and became a stain on our international reputation and a dent to our national pride.

“I believe that today’s agreement is a significant milestone. It closes a sad and tragic chapter in our economic and political history.”

SInn Fein leader Gerry Adams stated that the government had merely transferred the bank debt to the Irish taxpayers and they should have refused to accept the debt in the first place. His party voted against the liquidation.

Deputy Prime Minister and Labour Party leader Eamon Gilmore said the Government was ‘doing what should have been done on the night of the bank guarantee’ which was voted in by Fianna Fail before its dramatic fall from power.

Gilmore said: “This Government is doing what the last government should have done.

“The significance of wiping Anglo and Irish Nationwide - which will live on in ignominy - out of existence will not be lost on the Irish people.

“These banks and the people who ran them, and the golden circle around them, were the very roots of the crisis which has caused so much distress to the Irish people.”

The new legislation provides for the appointment of a special liquidator to wind up the bank immediately according to a report in the Irish Times.

A senior government source confirmed to the paper that a draft of the legislation had been prepared last autumn when a similar leak of sensitive information seemed possible.